Tuesday, October 10, 2023

Morning Note: Careful With That Conviction

On our strategy call yesterday morning, while I traveled between offices, we noticed the abrupt intraday turnaround (akin to last Friday's) in the equity market... My comment, without looking, was that it virtually had to be someone at the Fed saying something soft about go-forward monetary policy.

Sure enough, the typically-hawkish (higher rates advocate) Fed Vice Chair Phillip Jefferson essentially turned the tide with:

"While it may be too soon to confidently say we’ve done enough, the Fed can proceed carefully given more balanced risks. Jefferson also noted the “tightening impact of higher yields”, as well as being “mindful of tightening from past rate hikes." --H/T Bespoke Inv Grp

Dallas Fed President Lorie Logan chimed in yesterday as well:

"...higher yields may mean less need to raise rates."

Which pretty much jibes — albeit with more subtlety — with what we said last Thursday:

"In our view, another rate hike is highly unlikely, as it is highly unnecessary, given that leading indicators are signaling uncomfortable odds of recession (and, thus, falling inflation) in the months to come."

So it comes as zero surprise to us that the Fed is all but signaling that their rate-hiking days, this go-round, are likely over -- appropriately so, I might add.

As for the equity market, it remains in the mood to celebrate any evidence whatsoever that the Fed is done with their rate-hiking campaign... Thing is, for any rally to prove durable, the sort of news that presently inspires investors to party will have to culminate in the most immaculate of soft landings... I.e., the economy would have to cool just enough to get inflation down (sustainably) to the Fed's 2% target, while avoiding an earnings-crushing recession in the process.

While we're open to all possibilities, given the balance of the data we track, and the structural inflation forces in play, the soft landing scenario -- for now -- rests on the low end of probabilities.

Even BCA's Chief Global Strategist Peter Berezin, who's been outright bullish till recently, seems to have left the soft landing camp:

"The US economy is on a knife-edge where weaker growth could tip it into recession while stronger growth could trigger a second wave of inflation. Both outcomes will lead to a recession, which we expect to occur as early as the second half of 2024."
All that said, while in our view caution remains warranted right here, there could indeed be more upside to equities in the near-term, particularly -- given the current character of the trading action -- if we get soft PPI and CPI reads this week.

You can think of it this way, if what we're seeing in the data plays out as we believe odds favor (recession), ironically, as the trend gains steam, stocks in all likelihood (early on) will rally... That's an easy call to make, as, despite what the Fed promises (higher rates for longer), investors firmly believe that it will come to the rescue at the first serious sign of consumer, and, therefore, corporate profit, stress.

And while -- again, despite the Fed's own assertions -- that may indeed be the case, as we've illustrated, the history around recessions and the stock market has not been kind to that conviction.

Clients, in case you missed last Friday's video commentary, it's the one to watch for the whys and wherefores of our current positioning, and where we see things heading once we're through whatever's left in the present cycle.

Here it is again:


Asian stocks rallied overnight, with 12 of the 16 markets we track closing higher.

Same for Europe's so far this morning, with 15 of the 19 bourses we follow trading up as I type.

US equity averages are up to start the session: Dow by 163 points (0.49%), SP500 up 0.59%, SP500 Equal Weight up 0.95%, Nasdaq 100 up 0.54%, Nasdaq Comp up 0.57%, Russell 2000 up 1.27%.

As for yesterday’s session, US equity averages closed higher: Dow by 0.6%, SP500 up 0.6%, SP500 Equal Weight up 0.8%, Nasdaq 100 up 0.5%, Nasdaq Comp up 0.4%, Russell 2000 up 0.6%.

This morning the VIX sits at 16.82, down 4.97%.

Oil futures are down 1.03%, nat gas futures are down 0.56%, gold's down 0.20%, silver's down 0.16%, copper futures are down 0.72% and the ag complex (DBA) is down 0.05%.

The 10-year treasury is down (yield up) and the dollar is down 0.23%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 27 -- led by Albemarle, REMX (rare earth miners), EWZ (Brazil equities), Dutch Bros and FEZ (Eurozone equities) -- are in the green so far this morning... The losers are being led lower by DBB (base metals futures), TLT (long-term treasuries), GLD (gold), SLV (silver) and Range Resources.

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” ― Mark Twain

Have a great day!
Marty

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